A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Wednesday, October 31, 2012

An American Horror Story

An American Horror Story for Halloween...

Dear Diary,

Today I awoke to the news that the dollar is no longer acceptable in settlement for the purchase of foreign goods from foreigners. This news was immediately disconcerting because I have hundreds of thousands of these dollars saved up over the past 30+ years, and I'm planning to retire soon.

The President was on all channels assuring us that this is not a big deal, and certainly meaningless unless we're planning to buy a foreign car or travel abroad. My dollars, he said, will still be "as good as gold" here in the United States. The US, he said, has the most important economy in the world, and the dollar is our currency. The government, he said, would not miss a beat. The government, he said, can never run out of money. Our dollars are safe.

The President said that this news today was only because of the international money speculators who, because they thrive on crises, help to create them. He said that these "speculators" have declared war on the American dollar. He said that this is extremely foolish because the American economy has the largest GDP and also because the American government can never run out of money.

So, in response, he has directed his people to halt all international payments except those deemed to be in the vital interest of the United States. And for those deemed vital, he said that any government agency can independently authorize payments of any size needed to keep the vital foreign goods flowing in. America won't be held hostage by either our own internal budgets or foreign currency exchanges, he said.

I'm not generally one to panic at anything, but even as reassuring as the President's words were, I started to panic. So after a little reflection I decided that I needed to call in sick to work and run out to stock up on a few last-minute necessities, just in case. What I found was deeply troubling.

Many stores were simply closed for the day, and the ones that were still open were overrun with people who, I guess, had the same idea as me. Most of the stuff on my list was already gone from the shelves. So I went back home to call my broker.

I've been talking about a dollar collapse and buying gold for weeks now. Ugh. And I've been reading about it for months, but I was so sure that this was just one of many possibilities. And even if it happened, all signs seemed to be pointing to 2014 or later, so I was goddam cocksure that I had plenty of time before making a big move. To my credit, I did at least have my broker sell all of my bonds and put the proceeds into cash and money markets, just so I could move quickly into gold on a good dip.

I called my broker to make sure it was still liquid, what with the news and all. He said it is, as long as I'm not planning an international transfer. Next I called the largest gold dealer in my state, the one that had been recommended to me. But he said that he is only buying today, not selling. He said he couldn't make any sales because his suppliers aren't quoting sell prices today to replace his inventory. He said I should try again tomorrow. I tried a couple more dealers and got the same run-around. WTF?

So here I sit, writing this pathetic entry. I'm not sure what comes next, and I am literally beside myself in confusion, dismay, dread, despair and regret. I cannot decide what to feel. I have this deeply foreboding sense that I really screwed up this time. I guess I'll just have to wait and see what tomorrow will bring. But I think I already know.

The dollar is crashing abroad and my government's response is going to compound the problem taking it to depths never before imagined in a global reserve currency. My retirement money is already as good as gone. It's not gone, but it is now trapped while being sapped of all real value. It is trapped because I waited one day too long, even though I knew what I wanted to do with it. This is the real world, and there is no reward for knowing, only for doing. I didn't do, and now I will have to face whatever reality delivers while knowing what I knew. What an absolute horror.

Yesterday, I decided to test my ability to swap some of it for Gold. I was surprised when I brought 20 peace dollars into my local coin shop, that he gave me melt value.

Having had such a pleasant experience, today I decided to trade a little more. I brought in roughly $1500 melt value of silver dimes. But this time he offered me 10% below melt. I haggled with him, and got him to 9%. He explained, regardless of condition, silver dollars are sought after, dimes not so much.

He then grabbed a large bag of dimes from under the counter and offered to sell me them at 5% below spot. He said he is sitting on a ton of silver dimes, and that people just aren't buying them. And that he could just as easily not buy my dimes at all, but that he wants my future business.

So now, I still have quite a bit more silver to unload. But I can tell you this, the remaining silver dollars I have will be the last to go.

On the gold side, He had enough to choose from that I was happy to walk away with a 1/2 Eagle, a 1/4 Phil, a 20 Franc, and a 2.5 Pamp.

If I’m reading your posts of the last couple of days in the context you intend, then I can only say that I greatly respect your response. I understand that I have challenged your existing perspective to a degree that is more likely to provoke an emotional counter rather than rational consideration in most people.

I agree when you say ”An unstable gold price in a currency zone will be a stain on the reputation of the currency issuer/manager“, but suggest that it may be better viewed just as we do today, where the important metric will still be the FX pairs, but now they will all be gauged in an objective relationship triangulated with gold. This will remove background noise from actual changes of the relative strength of gold itself, leaving just the individual currency’s performance exposed. AG, gold should continually strengthen, and all currencies should reflect that. A CB whose monetary policy was to destroy currency by purchasing gold at a rate which kept their gold exchange rate stable would create deflation in other goods, another serious problem for their economy. Best possible option is to target stability in the things people actually use, as per the ECB mandate.

It is technically possible that gold could weaken in response to a specific situation AG, but this is an incredibly unlikely situation.

You said:

”Finally nailed it:

money = circulating credit “

I take it you can see why credit is not restricted by reserves, but rather only by the credibility to which it extends in response?

Where this logically goes I’ll leave to people’s rational consideration… some aspects run counter to what our conditioning would have us expect.

...the important metric will still be the FX pairs, but now they will all be gauged in an objective relationship triangulated with gold.

This will remove background noise from actual changes of the relative strength of gold itself, leaving just the individual currency’s performance exposed...

Not so tight with your position in the remainder of the comment. I think that post-transition a currency manager who manages his/her currency with the aim of keeping it stable in gold will outperform a currency manager who tries to target prices.

In regard to the money = circulating credit comment I was stuck on something in the presentation I'm working on with Aaron. Introducing circulation into the money = credit proof I'm using resolved the problem of explaining how we can have conditions where there is liquidity in cash and no liquidity in, for example, the inter-bank market. Resulting in the money stock no longer being fungible.

Essentially the argument is that if the credit instrument doesn't circulate at all it ceases to be money. This could be a temporary condition or permanent. This change also helped me to tidy up a few other rough spots as well.

Thinking about the words of Mayer Amschel Bauer/Rothschild “Give me control of a nation’s money supply, and I care not who makes its laws.” how can a gold backed money system prevent a market manipulation by the large gold mining companies in a similar fashion the banks do today? Aren't we moving from TBTF banks toward TBTF gold mining companies?

"I think that post-transition a currency manager who manages his/her currency with the aim of keeping it stable in gold will outperform a currency manager who tries to target prices."

And if gold continually strengthens, this will cause deflation. If that's what the currency users want, then I guess you're right. You are describing the exact reverse of the gold standard where the peg is just the other way. You must recall William Jennings Bryan?

AG, there's just not the scope for manipulation by any entity, because the saver is no longer enabling any.

ECB has the correct policy already in place, and they're not targeting gold. You want stability with the stuff people use if you want to keep them happy. The fact that their gold rises against all else is a pleasant bonus to their otherwise predictable everyday income and expenditure.

You also asked above about who will "regulate" freegold - the beauty of this system is that it is essentially self-regulating. The only requirement is that gold leasing and loans do not occur (thus preventing fiat gold). This is more easily achieved than one might think...

FOA: [By] changing international law such that no form of debt can force it's payment in gold! This opens a one way street for gold and a two way street in fiat currencies. No one will lend gold because they cannot force it's return in the courts, thereby making gold a physical only international currency.

FOA: Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one.

To protect gold’s status as [the ultimate collateral], and its invaluable contribution to a stable monetary system, courts will not enforce the forfeiture of any lesser collateral in the failure of a loan of the ultimate collateral. This will be enough to prevent the lending of gold, which will be frowned upon by the system.http://fofoa.blogspot.com/2011/06/from-treasure-chest.html

PhatIn January I too exchanged pink paper for gold in ZhuZhou. I dragged my Pakistani and Chinese friends along (I needed their guide services).I hade closed an account with the BoC and wanted to have less pink and more yellow. I bought 2 gram, 5 gram, and some Pandas. All at close to spot. Very nice, Chinese gold!

there is not such thing as "self-regulating". Please do not insult the evil side of human brain, it will somehow find a way.

I do not get well the FG concept, yet the absence of super currencies to be used as a CB reserve should somehow avoid trade account deficits going to eternity. On the other and some countries such as oil arab countries will be on the tread account surplus for a long, long period of time, e.g. somebody will be of the deficit side … hmm …

In the absence of opportunity to pass negative effects of one’s actions to another, one becomes self-regulating.

As you qualify your statement with, you “do not get well the FG concept”. AG the opportunity to monetarily pass the negative effects of one’s actions to another are gone, a situation which brings about automatic self-regulation.

Yes, I think the argument you made is the best argument for silver: "Once their London and US-based futures trading centers are exposed for the fraud that they are, silver will go HIGHER faster than gold because they still have some gold they can throw at the market." Yes, the fact that CBs have no silver means that the silver market stands a good chance of breaking first. But what happens after that? The gold market is likely to follow, no? If one over-leveraged precious metal paper market goes up in flames, the others are likely to follow, no? And what then? Then it seems like that fact that CBs have gold and no silver supports the argument that gold will be the reference point for the next global monetary system -- not silver. And at that point gold will not only catch up to silver. It will catapult miles ahead and stay there.

Someone looking to make a fiat fortune trading might buy SLV until the silver paper market crashes, then move everything into IAU until the gold market crashes. Why settle for one paper market collapse when you can profit from two??? But therein lies the problem. To be nimble enough to play both, you are stuck playing the ETFs, which are ultimately only a derivative, and which might stop trading at just the wrong time. So in the end you might be left with only a fist full of worthless paper. Your strategy seems suited for trading. But a trader has a different mindset than a saver looking for a long term inter-generational wealth reserve. You may be right about the silver market crashing first. In fact, I think you are right about that. But things will be so crazy after that happens, I fear it will be too late to move into physical gold even if you want to.

I am not trying to talk you out of your position on silver. If you believe in it and you are comfortable with it and you think you understand it, then maybe you have made the choice that it right for you. We are just sharing ideas here.

Two things that jump out from your post: First, why are you "for bimetallism"? Why not trimetallism? Or quadrametallism? Or quintametallism (gold, silver, platinum, palladium and rhodium?). Historically there was a role for bimetallism because PM coins were in circulation. If you think those days are coming back, then silver sounds like a good bet over the white metals. But I do not think circulating gold or silver coins will ever come back. And without them, I see no case for bimetallism.

Second, it's not just the CBs that have a preference for gold. It is the oil states. And the Chinese. And every international monetary system going back hundreds of years. It is the way it has always been and always will be. I assure you that when the dollar collapses, there will be no election for people to vote whether they want the system to be based on gold, silver, or a combination, or some other metal. The plans are already in place. Gold reserves are the Plan B. Silver, platinum, palladium and rhodium are for speculators and traders. Or companies that need these materials in industry.

Blondie said .."n the absence of opportunity to pass negative effects of one’s actions to another, one becomes self-regulating."

It would be an aggressive action for a Giant to initiate RPG. If he could pass the blame, he will, and to avoid negative consequences from fellow giants the blame will be passed to the shrimps when the time is right.The right time will perhaps be when enough gold is collected, enough being subjective.The passing of the RPG candle to the shrimp will perhaps be in a physical price market leak.In the meantime the self regulation can be observed by the little and often accumulation of the GLD pukes. No one wants to upset the apple cart.I don,t think there is a need for an aggressive, desperate action by a Giant (china) at this point as the Leverage and Bargaining power of the transition timing is a powerful tool to get favors from the $system. ButPost RPG, China will lose their bargaining chip, leaving them vulnerable to bigger Giants.SoDo the Giants need the go ahead from the $ system to initiate RPG, The USA could BEG to be released from their Curse of being the worlds reserve currency as their international and national agendas conflict.

In regard to your comment at November 3, 2012 2:07 AM I think you're making a couple of assumptions that are unsound.

And if gold continually strengthens, this will cause deflation.

In the post-transition gold/fiat currency regime this will indicate the opposite - inflation not deflation. A rising currency tells the issuer that demand exceeds supply. The solution is to issue more currency. The ECB won't have to wait for price signals (with time lags measured in years) to tell them how to respond.

Also bear in mind this banking union that is being created in the EU. The ECB has never had the data feed this will provide.

You are describing the exact reverse of the gold standard where the peg is just the other way.

No, I'm not. You can express a peg as, say, $35 per ounce or 1/35th ounce per dollar. It's merely a shift in focus. There's no "fiat gold" as one of the commenters remarked earlier.

You must recall William Jennings Bryan?

As an example of self-delusion, political opportunism or both? Yes.

AG, there's just not the scope for manipulation by any entity, because the saver is no longer enabling any.

Manipulation of what? Monetary policy is only half the story. Why do you think the Europeans are putting themselves through this agonizing process of overhauling the mechanism for setting fiscal policy?

They may be going about it the wrong way but that's a separate debate. It's clear that the PTB recognize you can't have a sound economy without getting both fiscal and monetary policies right.

ECB has the correct policy already in place, and they're not targeting gold.

They are using the only tools available to them at present. Do you think, for example, they MTM to spot prices because they think that is an accurate reflection of the price of gold?

Read the writings of the economists who are described as "fathers" of the Euro and the central bankers who helped design the ECB Eurosystem. In particular I suggest you delve into Robert Mundell's work on exchange rates and currency.

Look also at the management tools that the ECB is putting in place such as the banking union.

You want stability with the stuff people use if you want to keep them happy.

If you are a politician perhaps. If you are a currency issuer independent of government then this statement is nonsense. You want accurate data on the supply and demand for your currency.

The fact that their gold rises against all else is a pleasant bonus to their otherwise predictable everyday income and expenditure.

No, it will indicate inflation. You have to factor in time lags and also arbitrage between currency zones into your perspective on the post-transition regime. A rising gold price in your currency will be a warning not "a pleasant bonus".

It never ceases to amaze me how gold-bugs are cast as "evil market manipulators". True, we all have some real gold, and we all want it to be set free so that it's worth reflects our wisdom, relative to those who trust in paper (and its issuers).

But thst is really the full extent of it. If people can find an ulterior motive in that, why is it so hard to find the ulterior motive in paper?

If your gut instinct is to believe the mainstream media, and trust in the wisdom of your "civic leaders" than I fear you ruly deserve everything coming your way ...

After all, in the end, survival does favor the fittest. The stupid are an endangered species.

when I say ”in the absence of opportunity to pass negative effects of one’s actions to another, one becomes self-regulating“, I’m just pointing to a universal truth.

It applies everywhere, to everything.

Applying it in the context you have, it would follow that the US will become self-regulating once there is no one willing to enable them any longer.

The bottom line however, is that those choosing to store their surplus inside the monetary system are enabling irresponsibility at all levels. It’s a monetary problem, rather than a problem specific to the US or Giants or anyone else. We all use the system, we are all responsible to a degree. Take responsibility. Buying gold is the only way to take responsibility, to stop being a part of the disease and instead become part of the cure. When the flow of physical is stemmed to a great enough degree through the cumulative effects of people (Giant and Shrimp) buying gold, the existing system dies.

Quite where the current flow of physical is coming from is hard to tell, physical being thoroughly mixed in the metrics with paper gold. The flow of scrap (Cash4Gold etc) is an important part of this flow, as is a rising price, while the possibility that some entity is dishoarding exactly to smooth this transition is also a possibility. There are a number of entities outside CBs with the means (the physical) to do this. I’m not saying they are, but it’s not impossible. It’s not something I think about, as it is relevant only to timing, and that is neither here nor there.

What is relevant is how gold functions. This is the future paradigm, one in which gold functions. Everything else is a sideshow in a world where the most valuable thing we control is our attention.

If an entity were currently dishoarding gradually then I would suggest that they are most likely doing so in the interests of the greater good. If the function of gold were widely understood, the transition would be a lot smoother. Well it’s not widely understood today. In the scheme of things, it is possible to have too much gold. Who wants to “own the world” if in doing so they ruin it? I see plenty of people willing to attribute this to people’s “evil” nature, completely missing the possibility that simple erroneous human assumption takes us to the same place all on its own.

Understanding how gold functions makes such a possibility appear all too real. It is apparent why it is possible to own too much gold. It is apparent how the world changes when gold functions. It becomes apparent the "evil people" point of view appears ridiculously complex and unlikely beside the simple case of human error.

All the talk about gold, and almost all of it focuses upon how to profit from the transition. Close to none on how gold functions. Has it occurred to people that because of how gold functions you won’t need to profit from the transition? That we all profit anyway, gold owner or not?

As I’ve said previous, project yourself into the golden paradigm and look around, look back. It’s not necessarily what you expect. How about taking no expectations to obscure the view? I only seem to be able to find the thoughts of people looking from this paradigm, their view filtered by it. That’s one distorted image, good for generating paranoia and insecurity and not much else.

The reason I like that video is because it was such a radical departure (in its day) from the saccharine stuff other people were putting out.

To each their own of course. Perhaps ART would like to share his favourite video with us.

If he doesn't have one perhaps FOFOA and yours truly could create one for him. Perhaps a face-to-face debrief where we douse each other in petrol and then set fire to each other. Or perhaps we could all get together and perform a re-enactment of the Jonestown love-in.

Yes costata, I remember very well the music videos of the nineties and agree that one was very different in it's day. I do love the verve's music, but that video of body slamming left me feeling disturbed. I really like the "lucky man" video.

I believe my assumptions are sound because I’m using my knowledge of how gold functions to arrive at them, whereas you appear to be using your knowledge of how the current economic system (tries to) function, and extrapolating that.

I maintain that AG, gold will strengthen. That’s my point about WJB: he decried the pain of deflation gold was imposing at the time, the same pain which I suspect will be felt AG if currency managers attempt to keep their currencies stable in gold. Money is credit, and people don’t like being debtors during deflation. Once again, this is a terrible business model, so I can’t see the motivation. The better policy is to keep the currency stable in goods and services.

costata:”Do you think, for example, they MTM to spot prices because they think that is an accurate reflection of the price of gold?“

Of course not. That’s a great example of how a mechanism changes function with gold’s change. So many things change when gold begins to function. You seem to expect them not too. Most of their policies will be ineffective AG; its just out of their hands. The market rules via gold, and those with power today will find it greatly diminished then. They will have to be happy to manage what they can, and otherwise go with the flow, because they will be riding the currents rather than controlling them.

Blondie: “You want stability with the stuff people use if you want to keep them happy.”

costata:”If you are a politician perhaps. If you are a currency issuer independent of government then this statement is nonsense. You want accurate data on the supply and demand for your currency.”

Well then that demand data might not paint a pleasant picture.

Blondie:”The fact that their gold rises against all else is a pleasant bonus to their otherwise predictable everyday income and expenditure.”

costata:”No, it will indicate inflation.”

Inflation in this scenario, of this type, is good.

Tell you what: ignore my assertion that gold will strengthen, but try modelling that scenario anyway, just to humour me, and then test my claims. Remember that I am already assuming the banking system to be self-regulating as well, a claim you don't subscribe to yet concede you cannot exclude.

I'm applying a Misean/classical economics definition of inflation and deflation. Prices have nothing to do with it. I anticipate that the ECB will maintain a positive bias toward inflation. Two per cent is statistical noise.

This stuff is getting stale Blondie (my emphasis):

I believe my assumptions are sound because I’m using my knowledge of how gold functions to arrive at them, whereas you appear to be using your knowledge of how the current economic system (tries to) function, and extrapolating that.

Sorry that's total condescending crap.

In regard to the banking system it appears that I'm in good company on the question of regulation. I doubt the ECB is accepting the role of regulator in chief in the banking union the EU is constructing for their amusement.

Tell you what: ignore my assertion that gold will strengthen, but try modelling that scenario anyway, just to humour me, and then test my claims.

I've modelled several different scenarios. What "claims" would you like me to model? Delete your mystical fluff and I'll be happy to oblige.

Yes Blondie I could have googled "troll", but that wouldn't of afforded me the opportunity to declare my ignorance. Honestly when I heard "troll" I thought it was like the troll under the bridge in billy goat gruff; the troll that ate the goats.

I now see it relates to fishing, but probably more importantly "narcissism" or normal, but lonely adolescense?

I earlier asserted that you were "blocking the trail". In retrospect I could just as easily have observed that perhaps it was that my path had diverged, and left well enough alone. My apologies. I will pontificate no more, and allow everyone the opportunity to follow their trails where they will.

Blondie,For the good of the system.I sit in the golden paradigm, in a coffee shop within an industrial zone. Business is heaving.As an entity who dishoarded gold for the good of the system, i am pleased to see my gold made it to the coin shops.Im glad I said NO when approached by the officials, who requested i supply gold for the saudies, to keep their broken system from collapsing. Its for the good of the system they pleaded. I put the jug on.Look. I said. We know that gold is most valuable at its widest distribution point. Yes, yes they agreed.Well fuck off then you greedy bastards. The boiling water splashed at their fleeing backs.

AG, in every given currency area, the real price of gold needs to fluctuate, just as it did before 1922 in the international gold standard.

Now, let's say the issuer of the fiat can freely choose how to manage it.

1) If he manages the fiat to be stable with respect to gold, this means that the real value of the fiat will fluctuate (simply because the real value of gold needs to). Depending on the international trade flows, your currency area will experience periods of inflation and periods of deflation in terms of your fiat. Before 1922, these price swings could be quite wild. I suppose people would have serious difficulties with the deflationary phases (unless you run your banking system in a way very similar to the old hard money times).

2) If he manages the fiat to be stable with respect to goods and services, he will never have any significant deflation in his fiat, but always a benign small inflation - this is what the ECB is targeting at present. The gold price in terms of fiat would then fluctuate and adjust the international competitiveness of the currency area.

The medium of exchange, i.e. I owe you E50 which is a large bag full of groceries, remains about one large bag of groceries. Exactly what you would expect. The gold price, however, fluctuates and transmits price signals as to whether saving in gold or investment in MoE denominated assets is more desirable.

If you’d go for (2), as I would too, you’d need to adjust your terminology:

”The medium of exchange, i.e. I owe you E50 which is a large bag full of groceries, remains about one large bag of groceries. Exactly what you would expect. The gold price, however, fluctuates and transmits price signals as to whether saving in gold or investment in MoE denominated assets is more desirable.“

Because your currency now performs as the “savings” vehicle, and gold as the “investment”.

Gold is not a SoV, nor is it a UoA except as a tautology.Currency, finally, really does it all, all three monetary functions (actually all four if you want to include the standard of deferred payment).

That trade you described earlier, where the coin shop owner was happy to swap his 4 x 1/4 oz for your 1 oz Krugerrand; can you explain his motivation? Do coin shops generally prefer the 1 oz sizes, and regard the fractionals as a nuisance? Or was he just looking to profit by some extra cash by selling you higher premiums?

One of my realisations is that under Freegold, with a much higher gold price, for a small shrimp of modest lifestyle who wants to steadily sell down gold during retirement, cashing out a whole 1 oz at a time, whilst there is a steady appreciation of gold value, is probably a sub-optimal strategy. So I now tend to buy fractionals and am willing to pay their higher premium.

Obviously you wanted fractionals too. But I am interested to understand if there are reasons why some dealers might not be so keen on them.

@Blondie, Costata, Victor

Thank you for your earlier discussion and for maintaining civility during the process. It has helped raise some new insights for me that I could not possibly have arrived at on my own.

@Blondie,I am honored to get an answer from you. Although I do not get the full picture of FG, I can clearly see the reason and need for gold reserves instead of paper reserves. Currencies have cycles and limited life, while reserves should not be affected by such trends.

However, my dog instinct tells me that the closer you tie your currency to gold, the less you have currency in the market and the less you have credit (having no good credit is very bad). The looser the tie between gold and money, the higher the chance for manipulation in a form or another arises.

For instance, my dog brain can not comprehend how the currency speculations would be mitigated in FG (you know, Soros and GBP). At the end of the day, I guess you are with dog that currency/money/MoE should not be a good in itself, except maybe numismatics but definitely not for global traders.

If I can read your statement like: “regulation can not fix structural issues” we 100% agree. However, there are many non-structural issues that a decent regulation can remove. Decency and proper regulation can mitigate for a while the structural issues and gain precious time to fix them. Neither decency nor proper regulation happened in the last periods.

And in what concerns pissing against wind, let me share a little secret: if one is really good in ballistics, he can piss on the guys sitting next to him for a long, long period of time. If you switch the mind frame, that’s the case of USD/IMF$ as we speak …

Regarding your comment at November 3, 2012 9:34 PM. That's an interesting way of looking at the situation. Basically target prices vs target gold as being mutually exclusive. Let me mull that over for a while.

AG, in every given currency area, the real price of gold needs to fluctuate, just as it did before 1922 in the international gold standard.

Agreed but consider the speed of the trading in the FX market. I think that after the transition we may be using basis points when discussing the daily fluctuations in the price of gold in major currencies.

Re: gold vs other investments

After the transition gold will still be a kind of anti-currency. If you are, say, all in on gold after the transition it would be a rejection of your local currency and a posture that indicates there are no worthwhile alternative investments anywhere.

I also see gold returning to the role of portfolio insurance after the dust clears. The potential for an income stream and capital gains should tilt the playing field away from gold and in favour of alternative investments if the economy is sound. So I think gold will be small percentage of large portfolios.

This final comment is a response to Blondie's comment as well as yours. Gold will be an SoV alright. In relation to currency, you can't have it both ways. If there is going to be a 2 per cent inflation rate then holding currency is a guarranteed losing play.

The only way you can convert it into a winning play is to lend the currency out at some rate of interest that beats inflation and taxation. But once you do that you are no longer "saving" in currency you are investing in debt (or perhaps you could say investing in a counter-party's liability to you).

And in what concerns pissing against wind, let me share a little secret: if one is really good in ballistics, he can piss on the guys sitting next to him for a long, long period of time. If you switch the mind frame, that’s the case of USD/IMF$ as we speak …

Most worrying is a drastic rise in the amount of “accounts receivable” (A/R) on the balance sheets of Chinese companies..... However, Chinese firms’ accounts receivable are estimated to have risen by 45% year-on-year (YOY) according to reports filed so far, whilst sales have climbed by less than half that rate.

Our old friend Robert Mix comment on the China story from ZH I just linked.

DoChenRollingBearing

From the article:

"Indeed the auto making sector was put on notice by the Ministry of Industry and Information Technology last week when the latter warned in a statement that the industry required some serious downsizing or consolidation. The statement contained the shocking news that nearly a quarter of China’s nearly 1,300 automobile makers are on the verge of bankruptcy, and hinted that involuntary bankruptcy may be forced onto some of the smaller players."

***

In PERU there are at least 70 different Chinese auto & truck brands. Last time I was there (March) I myself saw at least 40.

So, YES, there is going to be some serious downsizing and consolidation in the Chinese vehicle manufacturing industry. It will be a bloodbath.

FOA: Wrong context. What advantage does the Power Elite gain by expending assets to save an already failed currency. Better to do what major players have done for centuries and are doing now, buy gold and evolve your power base to use the next reserve.

This makes good sense to me, assuming “the power elite” are a homogenous org such as the USG/Fed or PboC. But when I think of the “power elite” as individuals . . . then the water gets a little muddied. For example, which of the following “major players’ might be buying gold now and evolving their power bases (as individuals)?1. POTUS2. Benanke or any FRB President3. Mario Drahgi or Jens Weidmann4. Christine Lagarde5. Christian Noyes or their chief economist ?? White6. Warren Buffet or Charlie Munger7. Jeff Immelt or Rex TillersonProbably none of the above (with the possible exception of #3 and #5) – and why does that worry me?

As a former Silver stacker I find the most telling observation for getting out of Silver has been "Why are there no Cash for Silver shops?"

In France you see several "Cash for Gold" shops in every city but no "Cash for Silver".

When the government regulates the price of petrol/gasoline because of "emergency" measures then the population rushes in and buys as much as possible and hoards it. Governments by interfering with the pricing mechanism cause the exact problem that they say they want to avoid.

Many Silver commentators place the blame for the poor performance of Silver squarely on the interference of the government through their supposed agent JP Morgan.

So you have to ask yourself the question: "If government interference causes people to rush to buy petrol/gasoline why doesn't it have the same effect for Silver?"

Could it be that the meme about Silver shortage is greatly exaggerated.

Blondie: ECB has the correct policy already in place, and they're not targeting gold. You want stability with the stuff people use if you want to keep them happy. The fact that their gold rises against all else is a pleasant bonus to their otherwise predictable everyday income and expenditure.

Costata: No, it will indicate inflation. You have to factor in time lags and also arbitrage between currency zones into your perspective on the post-transition regime. A rising gold price in your currency will be a warning not "a pleasant bonus".

So which is it? How will life be after Freegold has begun?* Will currencies best be managed to be kept stable against CPI or against gold?* Is inflation (against gold and/or consumer prices) important AG, or is it "limp as a eunuch"?* Will irresponsible lending be profitable for banks AG?

I want to thank Blondie, Costata, VtC and others for the awesome debate over the last two blog-posts.

Then I would like to encourage this debate to keep going a bit longer in the hope that we can find some consensus, while maintaining courtesy. Of course we can all travel our own little mini-trail in this jungle, but it would be more helpful for noob trail-followers if we cleared a bigger path _together_...

I know which side I'm leaning to in the above questions (partially thanks to this debate), but wont somebody think of the coming n00bz?!

Terrible analogy, duggo. The sheeple all buy gasoline, the don't buy gold and silver. The only reason I still have a wee bit o silver is for the transition phase. Now you do have to admit thus far the daily charts of the paper price, which is still the physial price ( at least at shrimp volumes ) track almost lock step daily. Like twins. If you weren't clued in to the crowd here, you might just think saving either would be just as good.

Yes, I think fractionals suits us shrimps well (for use AG).Preferably I would keep all of my gold in this form:

http://www.combibar.com/products/50g-combibar-gold/

For me, the notable thing about my gold dealer visit the other day, was the different way he treated a gold for gold swap compared to a silver for gold swap.Gold and silver obviously just isn't equal for him anymore. And it was not just that he wouldn't swap at the present GSR (plus his premium). He wouldn't even think about making a deal at ANY ratio (realistically close to todays). It almost felt as if I came and offered him manure in exchange for a Ferrari, and it was just easier for him to say: "I'm out of Ferrari's", than to say: "OK, I'll accept but only at a Ferrari-manure-ratio (FMR) of 10 times todays official FMR". That's an interesting data point (but of course only 1 data-point).

Why then, did he want to make the 1 oz. for fractional swap? I have no idea! Maybe he just needed some heavier bling to impress his girlfriends with?

Interesting interview regarding the introduction of a Swiss Gold Franc as a complimentary "savings money" to operate alongside the Swiss "paper" Franc.It really does stand a chance of being introduced because the Swiss have unique political system that actually listens to the people.

Try not to get too hung-up on bad analogies Pat. It's the substance that counts not the nit-picking minutia.

In an interview with Bron Suchecki of Perth Mint he stated that during the recent past when the hype was really up for Silver and people were buying Silver coins, Perth Mint was sourcing 20 Tonnes of Silver every week from the LBMA and there wasn't a problem getting it.

Sure, no worries, and totally agree silver even mine is in weak hands. I will defend my gold with anythng not nailed down. I unfortunately don't have small farm with my own water and food, so I hope I can get to the other side unscathed ( gold-wise ).

AG all CBs except the ECB will likely not have severed their link with the nation state. Therefore, their primary function will remain as it is now: whoring themselves out for G. Deflation against goods & services would signal to CBs that they are not being particularly good whores, and could have used their printing press to acquire more goods & services for G.

So I think CBs will target that sweet spot b/w too much inflation against G&S and too little, if for no other reason than to maximize the effectiveness of seigniorage.

Interesting observations on silver. I have found no problem in making exchanges between silver and gold. And mostly at or above spot (depending on the form of silver you hold). Maybe you need to start looking at 'larger' companies for such transactions? ;-)

Though there has been plenty of buzz on boards geared towards 'like-minded' individuals, I haven't heard nary a peep from the 'common' man regarding the PMs. Talk of a top in silver is not warranted at this time (and that goes for Pt and Pd as well). Yes, we could see more downside, and I wouldn't be a buyer (except for gold); but I haven't heard the top bell ring just yet. I recall wise words from back in the day, "A market can stay irrational far longer than you can stay solvent." IMHO.

"I have found no problem in making exchanges between silver and gold."

You mean not yet.

"And gold? You will never know its price. It will stop all trading as it slices thru $10,000+." –Another Oct., 1997

During this time, after the paper market has failed, that GIANT sucking sound you hear when you call your dealer and mention that you have some gold for sale will be the CBs and Giants somewhere at the other end of the dealer network with their unlimited currency, their insatiable demand for gold, and their standing over-bid acting like a giant concubine sucking a golden golf ball down a tiny hose. Let's call these Giants and CBs "the buyers of last resort" for gold. Another said they stand ready to buy any and all physical gold offered for sale.

On the other hand, that sound of thousands of telephones ringing in the background, when you call your dealer to sell your silver, will be all the other shrimps placing their sell orders at the same time. And this is a serious difference between gold and silver. The few giants in the paper silver market are in it for the liquidity and the volatility. It is doubtful that they want to actually hump around 1,000 oz. bars. FOA said that when the paper markets fail, the big money in silver will be selling like crazy to cover the losses in paper gold and scramble into physical gold.

This one has nothing to do with gold but it make sense to post in the light shed by the title of this article: ‘Trillions of dollars worth of stock certificates and other paper securities that were stored in a vault in lower Manhattan may have suffered water damage’

Blondietoo late...'blocking the trail' is a metaphor now etched deeply in the collective psyche of fofoaville. I certainly keep it at the ready as I read through these comments. The next trollish writing I see ....bammm...they are going to be accused of 'blocking the trail'.

I'm trying to free your mind, Art. But I can only show you the door. You're the one that has to walk through it. You say that "Fractional gold pieces carry higher premiums. They are relatively more expensive and desirable compared to 1 oz coins. No coin dealer would exchange fractionals against a 1 oz coin without charging you a considerable sum."

Stop talking like someone who never learned how to do arithmetic. European 20 Franc coins and old British sovereigns all trade at a substantial discount to the modern bullion coins and fractions. If you want smaller gold, there is an inexpensive way to do it. Where I live I can get 20 Francs at less than 1% over spot. Personally I avoid the modern bullion coins because the premium is a waste of money for me. Of course, if you need to think in round numbers, you pay a premium for that luxury. Is it worth it?

Fractional gold pieces carry higher premiums. They are relatively more expensive and desirable compared to 1 oz coins. No coin dealer would exchange fractionals against a 1 oz coin without charging you a considerable sum. He wouldn't even exchange a 1 oz piece for another 1 ouncer without charging you anything either.

Fsck it, I'll bite. It looks like even your local coin dealer doesn't like you!It is not clever of you to extrapolate your own experience with one or three coin dealers to include all coin dealers in the world!My local coin shop has given me lots of great deals. You know why? Loyal customers are treated well. That's normal business anywhere in the world!Get a life.

Duggo, I disagree with the idea that silver is held by only weak hands. There is more to this world than first world countries/people who's experience is instant gratification and consumerism.

I believe for instance, that the rate of savings among the chinese is 30%, and I suspect they endure some hardship to achieve this. I have read that even the poorest indian woman wears a 10g gold bangle.

The point I'm trying to make is not gold vs silver, but to explore the idea of what constitutes a saver, and how weak or strong those hands that save might be.

Duggo was a sheep following a herd during the silver peak, trying to catch quick profits. Likely under the presumption he was smarter than the 'sheeple' at the time. Now he's falling for the same trap, with gold. He didn't learn.

@ Wendy.First let me say I like your style. Like me you like straight forward uncomplicated talk.My main idea with Silver was that I was going to make a fortune overnight. I wasn't particularly interested in Silver as such. I preferred Gold because it was unchanging. Bring it up from the bottom of the ocean and it's still shining.Why do people buy Silver and not Gold? My reasoning is that they think they are getting more for their money. The "poor mans" Gold. So what do people have in common that think they are getting more for their money? Lack of financial abundance. If you had lots of disposable wealth why would you buy Silver? Lots of Silver jewellery is covered with rhodium to make it un-tarnishable (just like gold). If you were offered a choice of necklace made from Silver or Gold. Which would you choose?I still think Silver is held by weak hands or maybe buy people like me that think that Silver is going to make them richer overnight.Reading FOFOA convinced me that the Silver idea was wrong.

In many other economic blogs, pinpointing the time-line of the reset is very carefully avoided. Well, that is the MOST important thing (if we have Freegold in 200 years, hell, even 30 years won't do, I couldn't care less). Lately I am seeing that this might not come in 10 or 20 more years, so, we have time to swap the silver or even go into the stock market again, out, in, out, and back to square one, or even die of boredom waiting for it.

Any brave participant dares to talk timelines?

IMO, the IMF$ looks like it will hold another 10 years at least. Aren't we going to get tired or discouraged? After almost 3 years, I am. Are you?

Right, and when people like Duggo start betting on the idea (freegold) that it's going to make them rich overnight, who admitted that he bet before on silver that it would make him rich overnight, then it's probably time to consider that freegold isn't going to be how freegolders would like it to be: soon.

Look Don, my worse estimate is 17%/yr (average increase in the price of gold in the last 10 years, that will probably accelerate and push into the 20s) for another 10 years, so 1.17xx10 = 4.8, 4,8 x 1700 = 8k$ by 2022. If that is a price based on the purchasing power of today, it SUITS ME FINE! (no need of 40x).

That's the difference between gold and freegold. Freegold makes rich overnight, gold as we've seen over the past decades, does not do that overnight.

Freegold is a believe that gold will spike suddenly at some point in the future, just like others believe that jesus will come to earth.

If you believe in jesus you will be rewarded positively when he comes. At some point in time people started to believe in jesus while not understanding why, they just wanted to be rewarded. Duggo is someone like that with the freegold 'believe'.

Don, I also believe in Freegold (all that is being mused over here sounds very likely to happen, but not so soon). TPTB are too strong, and inventive (most countries in the world admire the USA without bound and cannot conceive the demise of the $), they will resist against it like a belly up cat, + so many other variables that Freegold doesn't account for, what about a nuclear war, aliens arriving, maybe even jesus returning (hope not!, that is not my park). Anyway, there must be a black swan into the equation to help Freegold come soon, which is not a crazy thing to consider either. But all in all, I think it is not in 2013, nor 2015, maybe just after that the soonest (intuition and hope, don't ask me why).

Well, freegold is not the same as the devaluation of the $. Currencies have fallen before without spawning freegold after it occurred. It's mutually exclusive.

Freegold is a major bet, if the devaluation of the $ occurs, there will be a brief time you can sell your gold for the highest real value. If you bet for Freegold, you will need big balls to hold and face the real risk of your gold losing value again, in return for even higher value, later (that's the believe).

Thing is, Freegold is just an idea, it's not even discussed in public. It's a pure bet, a pure believe that this is in the plans by the 'giants'.

Everyone long gold will have to face that tough decision, because we the people only know if Freegold is a reality AFTER the tough ride, not before and not during the ride.

If Freegold is a solid idea, this might be an easy bet you would want to take. Problem is, when sheeple like Duggo starts to bet on Freegold, the integrity of the idea is majorely breached.

@ampmfixYou certainly did address me. I do not need advice on how to invest. I have been doing it all my life and very successfully.

I can switch at a moments notice when I see logic in what I do. Better to be a moment too soon than a moment too late.

I do not conform to any theory, religion or system. The ideas of FOFOA ring true. If you do not see that then OK.

If I see that the ideas of FOFOA need modifying because of new circumstances then I will not hesitate to jump ship.

You like many others here seem to like the endless discussion of minutia. You like the intellectual crossing of swords to test your supposed superiority and wisdom.

In my working life I knew many people who could never make a decision. They would argue and investigated countless graphs and spreadsheets because they were frightened to take that daring step into the unknown of actually putting their money where their mouth was.

With your distain for my worth you strike me as one of those losers. You talk the talk but can't walk the walk.

I had to attend a workshop on "respectful workplace". Disrespect was defined as words and/or actions that one knows, or ought to know, would not be welcomed by the recipient of said words and/or actions.

Fofoathe idea of a timing poll is a good one. There are several examples, perhaps even cited here, in which the average (or mean) guess of a large group comes close to the truth even if the outliers very wildly. I am for a poll.

I work mainly by e-mail and I have learned the hard way that when you want to complain to another person or write a strong email you need to think it over a night's sleep or more (in fact this Friday I composed an e-mail that looked like a work of art, to one of my managers, on some new initiative that I strongly oppose because it is not good for the company (I have 20 years experience in one of the top 5 electronic silicon Valley cos, my manager could be my son and has hardly 5 years out of college experience, go figure...)). Even after 2.5 hours of correcting and redoing the text I feel there will be some sparks tomorrow, it is very difficult to talk writing.

Good night all and excuse the violent scenario.

Sadly today I was fired up and the e-mail from our new friend Duggo made me break my e-mail rules. Apologies to all the readers and Duggo for my violent words.

Casting the theory of the ultimate emergence of a physical only gold market-aka freegold, a moniker I increasingly detest-as a belief system, which its detractors seem to have a strong propensity to do, provides immediate if none too robust ammunition against the theory.

At this stage in human history most, if not all, belief systems -or if you prefer, faith based creeds- are, for what should be obvious reasons, operating with rather sketchy reputations.

Of course the theory of freegold while not under the aegis of hard science, operates with, at least by my runes, very solid, even excellent, premises. In short, it's not a belief system, but, rather, an empirically based formulation and the world's monetary arena is its laboratory.

With that in mind, as more time has passed, the observations of folks like Another, FOA, and FOFOA seem, in general, to comport with developments on, as they say, the ground.

Obviously the clinching bit of evidence, the emergence of a physical only market, has not yet manifest.

However, let's consider the unprecedented and all encompassing pickle the hegemonic $IMF system finds itself in. The problems seem intractable at this point. And, more ominously, they appear to be accelerating in their ill effects such that it is unfathomable how the present teetering monstrosity has any chance of maintaining itself for another decade.

The evidence is clear that the ROW not only has no reverence for the $IMF system, it is actively trying to edge towards the exits, albeit in a way that might not cause the already shaking fingers of instability to do their worst before the aforesaid have a chance to prepare themselves.

The only things that would seem to forestall The mother of all monetary advances (MOAMA-not to be confused with the MOMA) either for an extended period of time, i.e. more than a few years, let alone permanently, are the sorts of developments that would threaten human civilization itself. Clearly that is how some folks are oriented in their thinking. In the meantime, I would like to point out that once the cracks in the dam reach a certain size and extend throughout the structure, slow motion collapse ceases to be an operating principle.

Peter Schiff over at Euro Pacific sure believes in (storing your wealth) in Silver. He is excited to announce “the world's first true silver backed debit card in conjunction with our new silver backed accounts”.

The allocated silver bank account operates under a strict government guarantee, making it one of the safest custodians in the world and uniquely qualified to preserve your hard-earned wealth. Buy and sell your silver 24hrs/day from the comfort of your own home Spend your silver with our silver-backed debit card at millions of vendors and ATMs worldwide Feel secure knowing that your metals are 100% physically backed and stored privately offshore Store your wealth in physical gold through Peter Schiff's Gold Backed Debit Card

Gold as a store of credibility rings true, for what is credibility but "truth". Aside from the occasional Art(ifice), no one here is out to lie to or deceive another. We may disagree, egos may be bruised, and some retaliation occur, but no one comes here to lie.

And this is why we come back to engage one another, becaue there is no deception here, it all real. Could you imagine how a forum like this would work between the people and their government?

We live in a fantasy world of mostly lies, propaganda, diversion, deception, fraud and "preception management". In a world like that, truth has power, credibility has power, because the people thirst for it. Because it so RARE, it is what we are all seeking--the truth.

Call it a store of value, call it a store of credibility, or call it TRUTH, but gold is closer to all of these than the worthless substitutes of fiat.

Fiat merely empowers the lies, the CONfidence, the predatory scam.

Gold keeps it honest. And if nothing else, I apprecitae the honesty and sincerity of those fellow believers who are sick and tired of the power of fiat, the lies, the fraud the Ponzi's, the scammers.

GOLD is the antithesis of all that, and it grows rarer and more desired as the people thirst for TRUTH and credibility above all the lies and deception that rule the status quo.

I don't know if that fits the "technicals" but they are a meaningless construct of years of manipulation, soon to be irrelevant.

I ran across this article earlier today about an unprecedented move by Japan. It kinda went unnoticed that their latest easing announcement was a co-promotion by the Bank of Japan AND the Ministry of Finance.

"The executive branch politicians in Japan have, for the first time ever, infiltrated the mother ship. BoJ independence is now under explicit political attack. This should be a warning to all central bankers with "sound money" religion - if you don't let the inflation dogs out and crank up the printing presses as the economy deteriorates, the politicians will come and shut you down. What we are witnessing is the beginning of the end for independent Japanese monetary policy."

@JeffYes, I mean not yet. And it is a wise decision, IMHO, to make the exchange of Ag for Au. But, the date and time of the ultimate top in Ag is certainly unbeknownst to you and to me. To try to impress otherwise would be irresponsible.

@ampmfix"most countries in the world admire the USA without bound and cannot conceive the demise of the $"

The US has much to be admired for. It has been slipping of late and I hope it will recover. Our people are suffering, not entirely of their own doing, and I hope there will be a collective 'pop' at some point as heads retract from nether-regions. That would be nice.

@Wendy"...that has been encouraging and providing the means for their citizens to save in gold AND silver."Observation from BOG: Not sure where you are getting the info that the Chinese are being encouraged to save in silver. MSM? There are advertisements for the purchase of GOLD but I haven't seen ANY for silver. In fact, at the stores selling both, what do you think is displayed in their showcase? Yes, gold, not silver.

With the election in the US coming up on Tuesday, I hope everyone doesn't think they're limited to only two choices. There's a third party candidate and he's from the future. President Dwayne Elizondo Mountain Dew Herbert Camacho has a new campaign ad out and he knows how to fight deflation ;)

I think that Freegold will appear gradually. I would not be at all surprised to see $55K an ounce or higher, but it might be around 20 years away as more people and institutions use gold for savings instead of US Treasuries and other "safe" debt instruments. It seems pretty clear that borrowing in the US, Europe and Japan (probably lots of other countries) will only increase unfortunately.

It also seems to me that while physical is best, there are also other forms of close to physical which while being paper have the allocated gold behind them, such as the Sprott Physical Gold Trust. GLD would also be okay provided you're a multi-millionaire and can convert the baskets to gold, shrimps of course cannot do this, and so GLD should be avoided by most of us.

Awake, although I agree that our 1st world experience has been akin to the "boiling frog syndrome", I don't know that this will continue even into the foreseeable future. There are many possible "black swan events" in our globally crazy unstable economic environment.

Because I don't know what's coming literally around the corner, I cannot hold paper contracts for metals, not even sprott's, it would cause me to worry.

I know with phsical in my care, custody and control, it belongs to me until I decide otherwise.

It's true that since 2008, it has seemed like our financial system must undergo a phase transition at some point, but it seems to be taking a very long time, and like a bad TV series, even though some event seems to be about ready to take the system over the edge, like the near default on US Treasuries in 2011, or the numerous near-Grexits, or even 2008 itself, somehow the system still survives in more or less the same form, except that the POG is higher, each near miss and additional borrowing helping to push the POG just a little higher.

I have thought about cashing out my retirement to buy the real thing, but penalty and regular taxes plus the ability of the status quo to survive all these close calls keep me where I'm at.

Wendy,Assuming that Homeland Security doesn't bust your door down and arrest you for the un-American activity of hoarding gold.

I say this facetiously, and yet, there's a surreal air of legitimacy to it. As government grows in power and prepares to mount an impenetrable force against anything that attacks it, nothing surprises me anymore.

When you consider what the Treasury and ESF are capable of in order to insure strong dollar policy, owning gold, the anti-dollar is something I'd never want a paper trail to.

But hasn't the end of COMEX been anticipated and predicted for a while now? And still here it is and there is open acknowledgment that there is nowhere near enough gold to fulfill all the outstanding contracts should people demand physical delivery. But still the game goes on.

I used to follow a Housing Bubble blog until I realized the financial problems were much larger than housing, and a poster there was very confident about a COMEX default. He was right about gold going up, he was wrong about about a default (think it was 2009?), and a casual search of COMEX default shows near misses and excited predictions of imminent failure over the last few years.

I don't mean to defend COMEX, but I am impressed at how well these mechanisms seem to survive numerous expectations of failure.

..there is nowhere near enough gold to fulfill all the outstanding contracts should people demand physical delivery..

Comex longs cannot force shorts to deliver. Only shorts can force longs to accept delivery. The shorts have the option of handing the longs paper or physical.

There is also no way to figure out the structure of the book of a bullion bank by studying COT reports. The OTC markets are hugely important and completely opaque to outsiders. These BBs are pros. They aren't tipping their hand to anyone.

Jim Sinclair recently described an essentially risk-free trading strategy that he maintains the BBs are using in the gold and silver markets. It's plausible.

There are many myths floating around about both gold and silver. Of the two markets there appears to be far more nonsense written by some of the buffoons presenting themselves as experts on silver.

I think the rule in these markets is "believe nothing, question everything" until you are satisfied you have uncovered the facts.

Phat Expat,

Just out of interest. Heard any rumours in China about silver being used as collateral for loans like copper, aluminium and some other industrial inputs?

Why does China encourage their citizens to buy silver? Because it will be an international reserve? No way. For the same reason for which they encourage their citizens to buy copper. To get rid of paper claims and to get real assets into the country. China is a major manufacturer of solar panels and all sorts of electronics, and they do need silver as an industrial commodity. Just as they need gold.

ETFs:

My main worry with ETFs, including both the Sprott funds and GLD, SLV is the following. All these trusts can be wound down as soon as the trustee decides to do this.

Imagine you are Eric Sprott or the trustee of GLD, and the problems in the gold market start. Why would you not close down the fund, pay your investors the cash, and sell the physical gold OTC behind closed doors to your best friend, to your wife's hedge fund or something like this.

Anyone up for a wager? Once the London gold market drops a gold fixing because of internal technical problems, the Sprott gold trust will be wound down, but not his silver trust?

@VtC"silver"That is interesting. What citizens are you talking about and what form of silver? And how do you think they will extract those resources from their citizens? Price hikes/drops? Point of gun? Nationalistic appeal?

On the discussion about "Gold is a store of value" with Blondie and costata:

Here is my position as of today. There is still some emailing going on in parallel, but I will be extremely busy during the coming weeks, and so for now, I just dump my thoughts here. Do with it whatever you want.

If gold is the international reserve and if it functions in order to adjust international trade and capital flows, then the real price of gold (i.e. in terms of goods and services) needs to fluctuate in any given currency area. This is the old story. If country A has a trade surplus with country B, gold has to flow from B to A. So gold will be more abundant in A. With a constant amount of goods and services in A, this means that in A, the real price of gold declines. (Under a gold standard, this means consumer price inflation because gold was the MoE at the same time). The situation in B is the mirror image. B loses gold, and so there is less gold per goods and services, and the real price of gold increases in B. (consumer price deflation under a gold standard).

Now you need to distinguish the international function of gold (this is the function that will be restored under freegold) from its domestic function as a MoE under the old gold standard. If you consider the real price of gold (i.e. gold according to its international function, but measured in terms of domestic goods and services), you can understand the international function in a way that's independent of which type of MoE is used.

(note to the Geek: this is precisely the key insight to understanding Gibson's paradox by Barsky-Summers - this work is way more relevant than people appreciate).

From the old data, we see that 1) Over long periods of time, say >20 years, gold retained its purchasing power. [Conclusion: at that time, although there existed credit and thereby paper gold, apparently the credit volume never became excessive, in particular not paper held by foreigners. In fact, cross-border balances were settled in physical gold according to the 'rules of the game' of the international gold standard. Gold as final settlement]

2) Over short periods of time, the real price of gold fluctuated wildly. If I remember correctly, changes of 10%-15% over 2-3 years were nothing special. This was the function of the international gold standard, transmitting price signals as a consequence of international trade and capital flows.

Bullish bets on the mainland currency via yuan futures offered by the Hong Kong Exchanges and Clearing (0388) have almost doubled since they were launched in mid-September.

Market watchers attribute their popularity to the yuan's increasing strength against the US dollar, but they caution such gains may not be sustainable.

If the yuan gains offshore, an investor stands to profit by selling the future contract - each with a contract size of US$100,000 (HK$780,000) and denominated in yuan. The minimum deposit for a contract is about 8,000 yuan (HK$9,927.41), meaning leverage of about 80 times.

If this is genuine hedging some people may be very long US dollars. It could be further evidence of capital flight from China. If it is insider money then China's gradual appreciation of renminbi is set to continue.

If it is merely speculators who could be on the wrong side of the trade then it is inconclusive. According to this fellow quoted in the piece:

"The yuan's strength is supported by real demand rather than currency speculation," said Tommy Ong, a DBS foreign exchange analyst. "But since exports have been weak this year, the yuan could be stable or slightly higher the rest of the year."

The discussion got hung up on the terminology "store of value" for gold. I don't think there was any significant disagreement about the function of gold as an international reserve and about the adjustment mechanism described above.

But I got the impression that many took the description of gold as a "store of value" as an invitation to dream of a constant purchasing power of gold. I think that would be false. In order to function, gold's real price needs to fluctuate. The old data pre-WW1 indicate that these price swings were quite wild. "Inflation" in the real price of gold of 10% over 2 years, then "deflation" of 15% over the next 3 years, etc.

If your economy (which includes the banking system, but also any MoE-denominated lending outside the banks) works on little credit and high reserves, you can probably stomach it. But with higher leverage, the bursts of deflation obviously become an issue.

Now if you are on a gold standard, you cannot fight this inflation and deflation without damaging gold's international function. The international function requires these fluctuations in the real price of gold. In particular, central banking originated from a sort of deposit insurance in order to prevent the regular outbursts of deleveraging in the banking system. But if you have a high credit volume and you fight deleveraging, you will also avoid price deflation and thereby neutralize gold's international function.

This is one of the major insights of freegold: If you don't like outbursts of inflation followed by outbursts of deflation (in fact, it is your advanced economy that eventually won't like this), you1) Either keep the gold standard (gold as an MoE domestically), but you inhibit gold's international function2) or you have to "set gold free" in order to retain its international function. But then you need a new MoE that's independent of gold.

This tells me that, once gold serves as the international reserve again, the local issuer of the currency1) Can try to peg their MoE to gold. In this case, they have to live with periods of strong inflation and periods of strong deflation (although in the long run, the purchasing power of gold will probably be quite stable). 2) Needs a new target for their MoE. The ECB has their below but close to 2% inflation target.

I guess we agree that the proponent of (1) will eventually get into some credit crunch that will make him give up the gold-peg. Just as it has always happened.

Now you need to be careful with the terminology in order nor to mislead people.

We see that in scenario (2), if managed successfully, the MoE will depreciate by a rather constant 2% relative to goods and services. [I do think 2% is a large number, and under freegold, they should actually manage to target a much smaller inflation rate, perhaps 0.5%]. But gold will need to fluctuate with respect to goods and services - otherwise it cannot function internationally. If the pre-WW1 figures are any guide, then you should expect fluctuations in the real price of gold of perhaps 10%-15% over 2-3 years. On the other hand, you can expect quite a stability over longer time frames when these fluctuations average out.

This is the view of freegold centred around gold's function as an international reserve.

Now do you want to call it a "store of value". It is my impression that this term does suggest to many people that gold would be purchasing power stable on all time scales. It cannot be. See above.

The rough picture I have is this:1) Well managed paper money will depreciate by perhaps 0.5%-2% per year relative to goods and services.2) Gold will fluctuate considerably relative to goods and services on a time scale of 1-5 years and then be rather stable over periods of 10-20 years.

Interestingly, here is Christian Noyer (BIS, Banque de France) in Tokyo on 3 October 2011 via

http://www.bis.org/review/r111006h.pdf

[...] Our common prosperity will therefore depend on our ability to create stable channels and mechanisms of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement [...]

Notice that he advertizes Euro base money ('the currency itself') as a safe store of value.

I get the following summary: If gold is allowed to function internationally, it will fluctuate quite a bit over short periods of time and then be rather stable in the long run. If you want to let gold perform its function, you have to accept this behaviour.

Only if you let gold play this role (unencumbered by any gold denominated credit), you can manage a local paper MoE in a stable way (0.5%-2% inflation target). But then this paper money is a possible store of value as well.

It was Noyer who said it before Blondie. The Euro will function as a Medium of Exchange, a Unit of Account, and a Store of Value (up to a small base rate in their inflation target - I bet it will eventually be a less than the famous 2%). But only once you set gold free and let it perform its role as an international reserve.

Once more: Setting gold free makes the Euro a store of value.

(Geek note: Since the Euro zone has both a balanced trade account and a balanced capital account [aka financial account in IMF terminology], the Euro is not drawn into any international role in a big way and can already play this role to a reasonable degree.)

Now what do you want to call gold in freegold? A "store of value", too? Definitely not an "investment" because physical gold is free of any credit or business risk.

Thanks for adding some more grist for the mill in your comment at November 4, 2012 10:42 PM. I'll come back to you and Blondie on the inflation aspect of this discussion separately.

Above you have a gold standard flow that is basically a trade settlement story sitting on top of gold domestic currency which is teetering between deflation and inflation because of trade surplus/deficit.

BTW I think your description of that system is accurate. It's also a mercantillist model - sovereign to sovereign.

Presumably this is how Blondie thinks I'm viewing the current system - through a gold standard prism. Actually the (very) short answer is that I'm looking at the current system as a mercantillist model which uses either sovereign debt, a mixture of public and private debt and/or FDI as the main settlement mechanism between deficit and surplus countries.

Secondly above VtC you have a Freegold flow of gold as a market based arbitrage to counteract trade imbalances. Basically the FOFOA model.

Where's currency in this second model? What is it doing? Why isn't currency doing the adjusting to reverse the trade imbalance?

I'm seeing this as becoming a "reference point gold" regime once gold is widely distributed around the globe. Any good being transacted in any currencies acceptable to trade partners. Gold prices all of the currencies so the trading partners can be confident that neither is being ripped off in a currency-based trade settlement.

If a trading partner doesn't want to hold their trade partner's currency they exchange into gold and send their trading partner's currency back into the FX market. Holding this gold reserve they can buy any currency they need down the track.

No hard feelings. I sometimes wish I had a "retract" button on my computer. I should read my comments carefully before sending. I don't always get my fact right but I should take care to get the recipient right.

Dear FOFOA,another thrilling post – very good. Thanks! Please set the "Dear Diary" on your list of preferred post formats!Two proposals:(1) A "Dear Diary" entry on the birth of Freegold. May be on Dec 24th?(2) A "Dear Diary" entry from the Euro world view.More in a second comment.

my theme is still on "consciousness" – the hidden driver of all thinking and action. Here we have it again, quote:"The President said that this news today was only because of the international money speculators who, because they thrive on crises, help to create them. He said that these "speculators" have declared war on the American dollar."What if the world’s collective consciousness would change dramatically so that "money speculators" would STOP declaring ”war on the American dollar"? Would the crisis then have a chance to come to an end? Would Freegold then stay in a kind of stand-by position?(I don’t want to mess up this blog with a discussion about if and under what circumstances a shift in world’s consciousness could be thinkable or not, possible or not, under way or not etc.pp. I only want to understand better the role of consciousness in the play of world finances, gold, silver and fear - in general.)

Firstly I want to make clear that I agree with everything you´ve written in the last couple of comments, except the following.

I have an issue/question regarding the ECB AG targeting of lower inflation than present and the Euro becoming a SoV.

I have no issue with the view that a well managed currency will slide a little bit towards the SoV scale on the MoE/SoV continuum, but I thought that the 2% target would perhaps have been chosen as a sweet spot to prevent it from sliding too far.

The reason for this would in my admittedly limited understanding be that if the currency serves as SoV in meaningful amounts, meaning superproducing entities stock more and more Euro over time,( Aka credibility inflation?) wouldn´t that make the currency much more sensitive to a change in sentiment/velocity so that it in the long run becomes a risk factor for the currency mananger whose mandate is a certain CPI-inflation?

Sorry about the long and rambling sentences, a symptom of my limited understanding I guess, but I wanted to throw the question out there anyway.

Finally, another reason why the real price of gold will not be constant, is Gibson's paradox itself.

Everyone who has a surplus and wants to do something with it over a certain time frame, has choices, among them1) to keep MoE (non interest bearing)2) to lend MoE to some business for interest3) to hold gold

The decision between (1) and (2) is determined by the expected credit risk relative to the obtained interest rate. Both are subject to the same inflation rate. For very large sums, (1) may not always be possible unless the CB provides enough reserves.

The decision between (2) and (3) is driven by future real interest rates measured in a weight of gold (Gibson's paradox), i.e. depends on nominal interest rates relative to future inflation and the future price of gold.

So if productivity gains are high and real interest rates are high, lending to businesses will be popular whereas if conditions change for the worse, people may prefer gold. The point is that the price of gold is free to react to such a change of preferences, and so gold can serve as a shock absorber because if credit worthiness is in doubt, the gold price will increase, thus recapitalizing the CB.

if the currency serves as SoV in meaningful amounts, meaning superproducing entities stock more and more Euro over time,( Aka credibility inflation?) wouldn´t that make the currency much more sensitive to a change in sentiment/velocity so that it in the long run becomes a risk factor for the currency mananger whose mandate is a certain CPI-inflation?

Fantastic comment. If foreigners hold a lot of your currency, doesn't this mean that they (are trying to) perpetuate an existing imbalance? Once this imbalance eventually unwinds, you'll get all the inflation of several decades in one single serving, no?

True or false?

Why does Christian Noyer say otherwise? (In the quotet speech, he basically advertizes to the Asians the holding of Euro base money as a safe store of value).

Imagine China has a trade surplus with Europe. The European importers wire Euros to the Chinese exporters. China (either the government or the various actors in the private sector) decides to keep these Euros, they hold them as a reserve balance with the ECB, i.e. as central bank base money.

Does this neutralize gold's international function or not? I think the answer is 'no'. The question is where do you get these CB reserves from? (This would be almost like a non-zero balance of payments. If the foreigner holds debt, this position enters the capital account aka 'financial account' in IMF jargon. But in this case, the foreigner holds a CB reserve. In the old times, this would be the 'reserve transfer account' which at that time was gold transferred in order to net the balance of payments to zero).

So where do these additional reserves come from? If the Chinese hold the Euro reserve for the long run, the ECB must create these reserves - otherwise they are missing somewhere else. How do you create a banking reserve AG? Well, it is equivalent to the ECB buying gold in the market and paying with newly created Euro base money. Gold indeed functions, and it does so on both sides of the balance sheet.

You see, both the importer and the exporter can enforce the 'rules of the game'.

If China exports goods to Europe, and the importing companies wire Euros,

1) China can enforce final settlement. They simply sell the Euros and buy gold.

2) If China doesn't do this and the Chinese keep the Euro balance in a bank account, there will be some foreigner holding a Euro reserve. Now the ECB can enforce final settlement: They buy gold and create Euros in order to supply the reserve that has stopped circulating because the Chinese have decided to sit on their Euros.

Either side can enforce final settlement. This is exactly as it should be, isn't it? No rogue mercantilism possible.

You see, when some in Congress call China a currency manipulator and claim the US was a victim, this is of course bullshit. The US can enforce final settlement, too. They just need to buy gold in the market and then pay off all Treasury bonds held by China in gold at market price.

Each one of them, the US and China, can enforce final settlement.

When Noyer tells the Asians that they can safely hold Euros as a store of value, he is really saying "You can hold Euros, that's very convenient for you. We will have the balls to purchase gold in the market in order to back these reserves."

Here is a related remark. These days, the goldbugs on all channels hyperventilate about the Bundesbank being unable to recover their gold from New York.

This talk completely misses the point. The threat is not that the Bundesbank would retrieve the gold and then sell it in order to defend the Euro. This is IMF-think.

The real threat to the position of the U.S. is that the Bundesbank might purchase gold in the market: "Hey, Timmy, ship us the gold. If you don't we buy twice that amount in the market." Timmy will call FedEx before you can say "GLD Puke".

Canada, the land of Rob Kirby. I thnk he shares Wendy's peace of mind.

Jesse, Freegold requires Fiat, True, but it also keeps fiat honest. Until freegold, it is a means of manipulation.

Victor: The gold is not where it says it is. Possession is a mirage. The ECB can list it as an asset, but is it really there? If it is, great, because the claims upon it will not be honored, a problem in and of itself.

If it isn't there, bye bye Euro anyway.

COMEX is a currency trading arena, as long as traders are focused on chasing paper profits and not taking delivery of gold it can go on forever.

But something is changing now, as predicted, and that is the concern for where the gold is, as opposed to where it supposed to be.

The so called "reports of official holdings" are just numbers on paper, not to be trusted. So the cntinuing repatriation of foreign gold holdings is looking more and more like a run on the bullion banks in slow motion ... but accelerating.

If everyone "cashes out" and goes into gold (as I have in my own small way, since I am just a pauper anyhow) then the system WILL crash (sooner) through lack of confidence (the only thing pre-freegold fiat has going for it).

Those who look at the many years of failed collapse predictions and say to themselves "I'm not ready to do that yet" do keep the system alive, but that is not meant as an insult, only an observation of the majority's thought process.

Risk and timing do go hand in hand. When the majority repudiate debt, things will happen quickly.

Change is preceded by periods of status quo. The longer the period of status quo, the larger the change / shock. But all massive structural resets throughout history were indeed preceded by periods of normalcy bias.

As the story relates:"And even if it happened, all signs seemed to be pointing to 2014 or later, so I was goddam cocksure that I had plenty of time before making a big move."

I imagine this same thought has played out a million times over several decades and each time the end result has been, "damn they're good at kicking the can".

I do believe we will all live to see that can drop off a cliff. I bet the farm on it. As more and more "others" do, the can does steadily approach the cliff.

Brad DeLong explains the gold relationship to the idea of Gibson's paradox (which largely holds true outside of the gold standard) as

Basically, gold pays no dividends or interest. It is thus expensive to hold in your portfolio when real interest rates are high, and cheap to hold it in your portfolio when real interest rates are low. When interest rates are high, you have to be pretty confident that gold is going to rise in price in order to hold it in your portfolio--which means that when interest rates are high you sell gold unless you think the price of gold is low.

Of course gold will be constant - think of the key distinction between value and volume explored in Freegold Foundations

Man discovered that this was gold's highest and best use thousands of years ago. Once you've produced capital for the marketplace, whatever asset class you choose to deploy your earned credits into will feel the economic pressure to rise in price. If the monetary plane was volume-fixed (or even constrained), it too would rise in price as real capital is added to the economy. But it has become a system that expands in volume rather than rising in price.

This is hyperinflation: quantitative expansion of savings! If the pool of savings rose only in value and not quantity, then each new net producer would have to bid "savings" away from an old net producer, and "savings" would retain their proper relationship to the pool of real marketplace capital available for purchase.

If you choose to deploy your credits into the everyday physical plane, the tangible goods plane, prices will rise. If all the savers chose oil for example, we'd all pay very high prices at the gas pump. Or choose agriculture for your savings and we'll all have to work an extra hour to feed ourselves. No, you want to choose something that both rises in price (rather than expanding in volume) and also something that does not infringe on others or economically impede the capital creation process that feeds value to your savings. And as an added bonus, if everyone chooses the same thing, it works extra well. This is called the focal point.

Now, the ECB puts out a ConFinStat every single week, 52 weeks out of the year. And every week it makes quantitative volume adjustments, like net increases or decreases in both gold and foreign currency reserves. But it only makes qualitative or value adjustments on four of those 52 statements. This is when the ECB marks its reserves to what the market says they're worth. The MTM party! And for the last 12 ½ years the trend has been that, proportionally, the Eurosystem's gold reserves have been rising while their foreign currency reserves (mostly dollars) have been falling. Here's the chart:[...]

Yet if we look at those reserves only quantitatively by volume, the opposite is true. Foreign currency reserves (again, mostly dollars) have grown over 12 ½ years in volume, from roughly $260 billion to $310 billion from a dollar-denominated perspective. Meanwhile the Eurosystem's gold reserves have fallen, again, only quantitatively, from 402 million ounces to 347 million ounces in volume.

This view, the volume-only view, is the fundamental modus operandi of the $IMFS that praises quantitative (voluminous) expansion and "growth" while ignoring qualitative (value) degradation. The reason is that governments and central banks can only print volume, not value. Think about this for a moment.[...]Recognizing this particular valuation/accounting shortcoming (along with "a few" others), the ECB has been at the institutional forefront implementing useful deviations. Essentially acknowledging the IMF's own admissions of ambiguity within the manual, the ECB tactfully says, "the definition of reserve assets included in the 5th edition of the IMF Balance of Payments Manual leaves some room for interpretation," setting the stage for its own definitive refinements as put forth in its "Statistical Treatment of the Eurosystem's International Reserves" formally published October 2000 and found on the ECB website here.

So, from this volume-only view loved by the $IMFS, here's what a chart of the Eurosystem's gold would look like:[...]But from the volume times value view (which ldo makes tonnes more sense and also assists the little guy deciphering the monetary mess), here's the true picture:[...]A different view, wouldn't you say? Do you remember this quote from ANOTHER?

"Know this, "the printers of paper do never tell the owner that the money has less value…"

The funny thing is that writing this post made me want to go look up that quote. It was written on 5/26/98, six months before the euro launched as a unit of account and 42 months before the ECB launched its euro medium of exchange. Now yes, of course, at that time (1998) no printers of paper currency told you their product was losing value. The dollar was still showing gold on its books at $42.22. But here's what I started to think about: Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter!

Going back to my first post, see how similar Brad Delong's comment is to VtC's? VtC wrote:

So if productivity gains are high and real interest rates are high, lending to businesses will be popular whereas if conditions change for the worse, people may prefer gold. The point is that the price of gold is free to react to such a change of preferences, and so gold can serve as a shock absorber because if credit worthiness is in doubt, the gold price will increase, thus recapitalizing the CB.

Lawrence (sleepy) Summer's work on Gibson's paradox earned him the position of Treasury Secretary post Rubin, and his "development" of the interest rate forward swap is a huge boon to fiat, in that this derivative irs pricing grid both controls market discount rate (i.e. LIBOR scandal) as well as gold dollar price supression through total control of capital cost (long and short term Treasury spread).

It upsets some people here to bring up Jim Willie or Rob Kirby or Harvey Organ - you can get boo'd and hissed out of the forum as an intellectual "turd" (as in Ferguson).

But how else does a sovereign run such massive deficits year after year and maintain ZIRP, as well as gold price suppression. Worldwide reserve holdings in $ are not enough to accomplish this.

And as Rob Kirby has said, what counter party on planet earth has the credit facility to back a 7 trillion dollar intrest rate swap with JPM only to unwind it a month later, if not the Treasury / ESF.

Eric deCarbonnel's work on this topic was revealed around 2009-2010 I think ... marketskeptics.com was it?

But the dollar, as the original "derivative" of gold has much company in the 1.1 quadrillion of notional paper debt cousins.

I do believe that JPM's (bye bye Jamie) 5 billion dollar London Whale loss is gradually becoming 20 billion. That is a black swan in the making.

But the fact that the LIBOR scandal, which makes a mockery of all these municipal debt payouts, as well a global wealth transfer mechanism to many homeowners appears to escape the attention of the mainstream.

If there was anything that SHOULD have brought the can to the edge of the cliff it was the LIBOR CON.

Yet, people do have confidence in their governments ability to rape rob and pillage on the behalf of their coporations, if only to enjoy the trickle down effect of crumbs falling upon their plates.

Clearly there is a proven better way, but we abandoned it, just as we abandoned Capitalism, and now give it a dirty name.

Such is life -- we all have "many hours of reading" ahead of us, but do not forget the many years of living behind some of us. Some who do remember 1971 as bright and inquisitive teenagers.

It upsets some people here to bring up Jim Willie or Rob Kirby or Harvey Organ - you can get boo'd and hissed out of the forum as an intellectual "turd" (as in Ferguson).

But how else does a sovereign run such massive deficits year after year and maintain ZIRP, as well as gold price suppression. Worldwide reserve holdings in $ are not enough to accomplish this.

FOA: Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

FOA:You know, modern financial engineering incorporates all the physical factors of "just in time delivery" management, and labels it "just in time dispersion of risk". In other words: they try to take all the perfect workings of a mechanical operation and replicate it into financial dealings. But, financial instruments, while understood by us as being paper bonds, stocks and bank accounts, are actually completely organic! They are, like money, really just concepts of value we hold in our head; not oil filters or fuel pumps we hold in our hands. The "worth" of things is a "value" we mentally create thru countless interactions with each other as we go thru the day: interactions we call "the markets".

It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. (It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

Maybe you have read too much of those writers, who mostly deal in conspiracy, innuendo, subscriptions, and silver, not necessarily in that order. They, and you, are watching the tail wag the dog.

FOFOA: It is the physical plane that drives the flow. It is the producers that produce the stuff. And it is the net-producers that produce enough extra stuff that it can accumulate in the possession of the monetary plane managers. It is the savers that drive the economy. Savers are net-producers. Net-producers are savers...

Savers drive the economy, and the $IMFS consumes it. And what of investment? The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods. The concepts I hope you'll think about and discuss in the comments are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane only exists to assist the Superorganism by transmitting information through prices and lubricating the flow. Savers drive everything.

FOFOA and company believe that silver will fall because there is (conceptually) no need for a second, inferior, precious metal.

This is probably wrong, however that is not the crux of it. Silver will be revalued to perform the necessary function of highly valued medium oif daily exchange. You will get less gas, fewer hogs, and smaller cords of wood for your non-silver currency.

As for the posts at the top of this chain, kind of amazing. The dollar crashes and someone wants to know what they can sell their gold for ... in other words, wants to trade gold for bottom-of-the-barrel currency. I guess that's what they call successful investing.

Fantastic insights! We NEED silver as a medium of exchange! Clearly, fiat currency has failed in this function. I have found it is nigh impossible to exchange my fiat for gas and food as of late!

Plus, this will create JOBS because we'll need more clerks with the skill and aptitude to judge & detect counterfeits in every transaction! The Romans had it right millennia ago! We need to go back to that system! While we're at it, let's bring back slavery too, and killin' dudes with swords!

VtC,Awesome post, thanks for the effort ! (same goes for everybody) “Now the ECB can enforce final settlement: They buy gold and create Euros in order to supply the reserve that has stopped circulating because the Chinese have decided to sit on their Euros.”I am wondering: ECB should PRINT more euro’s and use that ADDITIONALLY PRINTED euro’s to buy more gold for reserves, thus enlarging the monetary base? Or the ECB is buying gold thorough EXISTING euro base ? I am somehow puzzled, as the euro base is expanding rather fast, while the Eurozone has everything else than inflation, not to mention growth.

As well, what I perceive is a global T Bond beauty contest: USG bonds vs EUGovt Bonds. Both super animals are shopping for the buyers of their sovereign papers, and the EU teaser is the strong currency. It is to be observed how the pressure they put on economies to deliver this stable currency can last. Euro is rather stiff than hard, my humble opinion …I 100% agree with your conclusion, one currency can be as hard or as weak as the interest of users dictates, and this has nothing to do with "the international currency of final settlement"-gold.

Many good comments here, I agree with them all. I had not seen the FOA explanation of derivatives but agree with it wholeheartedly, and it is well exlained in simple terms.

I think today, we are so far past the IMF$ timeline that derivatives are very delta sensitive now, especially interest rate derivatives which make up about 90% of the total, concentrated within the top 5 TBTF's (in the US total).

To say that Goldman, JPM, Citi, MS and BOA are "Too Big To Fail" is to say that their derivative positions are too big to fail, which essentially is extrapolated from the idea that the dollar is TBTF. Which is another way of saying the USA is TBTF.

And herein lies that favorite word of the globalists, "interdependence". Like the fiat currencies, they say, "if one fails, we all fail".

But if the counterparties all play by the same "rules" (how ironic in a game without ethics) the Fed will bail out the counterparties in an unwind, to a point.

Lately, the ISDA seems to re-intepret the rules. That is the funny thing about paper, it can say it is anything it wants behind a veil of counter-claim complexity.

The HORROR Story will unfold if there will be no countries to accept the USG Bonds and related USD reserves. To accept as well the use of USD for ordinary transactions and as SoV for smaller individuals. Not so soon ...

I was thinking of past merry-go-around of modernization&progress: East Asia in ’80, ex-communist block in ’90, China and Turkey in ‘2000. Now were are talking more and more about the modernization and progress of Africa. Approx one billion people and lots of natural resources. How much paper per capita they can absorb ? The wealth pump might work for another 5-10 years …

Dimitri'believe' is probably not the right word...not a lot of 'believers' around here...most of what you will find here is 'best guess based upon observation of fact' kind of thought.Please note Fofoa is not an advocate (I don't think he has the energy for revolution.) Most of us here are just trying to find the right spot to be standing when the music stops. If you read enough here I think you will find the major themes are curiosity, caution and patience (well at least the first 2)...

"A/FOA said the ECB/BIS strategy was to “expand and support” the dollar paper gold market so the dollar would eventually “bankrupt itself” just to keep the gold market going and stay in the game with the euro.

FOA (08/13/01; 07:24:30MT - usagold.com msg#96)

A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar / IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market [the ECB/BIS is supporting and expanding paper gold as a strategy]. Inflating the gold market place with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.

[…]

So, don't count on this destruction of our paper gold market to mark the real value and availability of physical gold; that ratio will split somewhere down the goldtrail. This action will scare most harden gold investors to death; especially the ones in leveraged gold stocks and lesser white metals!

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure. A structure of American based "paper gold".

We have been saying for some time that this will be "the" show to watch unfold; but only if your holdings allow you to stay still in your seat as it happens (smile).

They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot.

So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. Too many of those “gold” FDIC stickers out there! If those stickers fail, the dollar loses. So the “gold” market is TBTF. Remember this from FOA?

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because worldwide dollar expansion reached its "non-hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.

In that truth, these paper gold positions act like FDIC insurance at our banks. It can and will manage only a small determined portion of bank runs,,,,, not a full scale failure of the banking system. In a real full banking failure we would all get, perhaps, 80% of our covered $100,000 and 10% of the rest.

The same is true for these gold position's performance; real gold delivery along with true price performance, matching real bullion trading, would be only for the very few. For that matter, an actual functioning paper gold marketplace would be for the very few, too! But, in the same way a bank account owner understands the credibility of FDIC insurance when times are good; the international dollar asset owner will not grasp that modern paper gold hedges cannot be allowed to work until after a real serious price inflationary run begins.

For the first time in this portion of the dollar's timeline and our lifetimes, such an inflation is about to show its face!

So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size. They might think they can rocket the price at that point and get it back, but more likely we’ll see more allocation requests coincident with a falling (paper) "gold" price as the longs dump their worthless “insurance” while wishing they had the real thing.

See that - "So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. "

@Michael dV"...I think you will find the major themes are curiosity, caution and patience (well at least the first 2)... "

It's always that last one that gets you. Good points!

@costataInteresting conversation with the banking types here. It seems that most loans, consumer or commercial, have the underlying asset as collateral. Not so much the use of external items (such as copper, steel, silver, etc...). Which, if you know the Chinese, makes sense. Much of the information provided by the loan seeker is suspicious, at best. They don't have the same level of visibility here as in the West. Maybe they will get there, but not in the near future. Americans, and I suspect many westerners, are quite open about their personal information. The polar opposite of most Asians.

Oh, and of course, I forgot to mention about kickbacks for certain loans. If you want a 'large' loan, and actually receive one, you can bet that a certain percentage will be kicked back to the originator (maybe in the form of a gold business card?). ;-) It's just the way things are done.

It seems to me the Eurozone and their Grand Gold game are running out of time: the danger is that the Club Med debt-deflation spirals out of control and the latin mobs install Mussolini 2.0 and Franco 2.0. At that moment, it will be Eurozone no more and the Grand ECB Gold game collapses.

But how else does a sovereign run such massive deficits year after year and maintain ZIRP, as well as gold price suppression.

I don't think the U.S. is involved in suppressing the gold price. They will eventually need a rising gold price, too. We know that the Europeans have always preferred a higher (true market value) gold price.

How they manage to issue so much debt? Because foreigners have bought this debt all the time and because oil producers keep invoicing in dollars. The U.S. government has always pleased strategically important "big boys": the oil producers. This is enough to create an incentive for other exporters (China) to support the dollar, too. In order to amass such an amount of debt, it is largely irrelevant how the Jim-Willy-reading little silver bug feels today.

I do believe that JPM's (bye bye Jamie) 5 billion dollar London Whale loss is gradually becoming 20 billion. That is a black swan in the making.

You see, some people see a move on the chess board and remark that the figure of the black bishop has some ugly scratches at the left side. Somebody else watches the same move on the board and thinks "checkmate in 9".

Bjorn,

But I was also thinking about domestic savers stocking up on Euros as a potential problem. Which is why I still think that the 2% CPI target will stay on after AG. Agree or disagree?

Obviously I don't know whether they will eventually aim for an inflation rate below 2% provided that this turns out to be possible. But I disagree that domestic savers holding Euros for the long run necessarily causes a problem. I say Euros, but not Euro denominated government debt here.

What is the saver's Euro balance? It is a deposit in the banking system and provides part of the reserves of the commercial banks. Naively you would think that higher reserves entice the banks to increase their credit volume. Empirically, this is not what happens. The credit volume grows and shrinks depending on interest rates, lending standards and demand for loans, and then the reserves follow, i.e. the commercial banks who have created credit, later try to acquire the reserves in order to back up this credit.

The second question is whether Euro denominated savings threaten a spike in velocity at a later stage and thereby HICP inflation. Why would they? The MoE saved in this way is a part of the surplus that people have decided not to consume. You get consumer price inflation only if people change their mind and suddenly start consuming (or at least stock up on canned food). What you might get is that people suddenly sell Euro deposits and buy gold with it. Fine. This is one of the functions of free market gold. (As a side effect, this tends to increase the value of the ECB's gold reserve and even provides a valuation buffer against possible damage from the loss of bank deposits). If the ECB does not agree with this move, they could even dirty-float against gold and sell some of their own gold into the market. This would be some intervention and not exactly reflect a free market attitude towards gold, and so I am not sure I want to recommend it.

Technically correct, but you might wish to count the Canadian and the Mexican production as domestic (think about it: what can they do other than sell to the U.S. for dollars?). Then it's easily half a year or more.

Edwardo,

As long as the amount is large enough in tons that it could cause a dislocation in the physical gold market.

Well, if the weight is so small that this action does not move the exchange rate of the Euro, then this amount is not really needed. If it does affect the exchange rate, the ECB would effectively wage a currency war against the U.S. and make the U.S. lose some additional gold in international trade.

Timmy has to ship it when the phone rings, that's the bottom line. And Turk and friends effectively promote further life support for the dollar when they complain that the Bundesbank doesn't have access to the gold in order to sell it and thereby defend the Euro. These goldbugs have it all backwards. In order to defend the Euro (if that ever became advisable), the Eurosystem would purchase gold. Because it is this transactions that increases their reserve ratio (even AG when there is no need to keep Timmy in check).

Naughty Slumdog,

Or the ECB is buying gold thorough EXISTING euro base ?

The ECB does not own the liabilities side of their balance sheet. If they want to purchase gold they either have to sell an asset (such as any leftover dollars they might have), or they can expand their balance sheet and give fresh Euros to the seller of the gold.

Both super animals are shopping for the buyers of their sovereign papers, and the EU teaser is the strong currency. It is to be observed how the pressure they put on economies to deliver this stable currency can last. Euro is rather stiff than hard, my humble opinion ...

No worries. The "beauty contest" is a matter for the individual European governments. The ECB is on track in terms of starving the governments of liquidity, just as required in order to keep inflation under control.

dieuwer.

I bet you will once understand that it was the ECB who planted this bomb. And you will also see why they did it.

It's odd how people are so slow to recognize when the game has changed. The implications of the HK handover to the Chinese should have been easily recognizable, and yet, many HK'ers are in disbelief as to how their 'system' is changing. How could they not recognize what was to come, irrespective of the sweet nothings whispered by their new overlords? It seems many EU citizens have this issue as well.

Most people don't read this blog! I would guess than almost zero chinese citizens read this blog. I would also guess that non-western people are not "weak hands" as they have relatively way more to lose or gain than we do.

If you have something that doesn't do the job you wanted it to do. You get rid of it. Kinda like how I bought silver because I thought it was the same as gold but with more leverage (lol) then had to sell it after reading costatas piece. Which reminds me of,The $ will fall out of use when gold doesn't want $'s.

In defense of the silverbugs, i live in an area of HK where I counted 21 'cash-for-property'(ie, realestate agents) outlets within a 100m radius, and only 1 cash-for-gold shop. If I were to accept this to be compelling evidence property, which in some previously down-at-heel regions has inflated by 41% this year, were a superior investment to gold for the future, how would you rate this reasoning?

Turk and friends effectively promote further life support for the dollar when they complain that the Bundesbank doesn't have access to the gold in order to sell it and thereby defend the Euro. These goldbugs have it all backwards. In order to defend the Euro (if that ever became advisable), the Eurosystem would purchase gold. Because it is this transactions that increases their reserve ratio (even AG when there is no need to keep Timmy in check).

Intriguing. Maybe you have something new for me today.

Can you play out a scenario perhaps, where the exchange value of the euro is collapsing because there is insufficient demand to hold it (HI) and the ECB choose to support the value of their euro in the market, by issuing further euros and injecting them into the market via gold purchases? That is the situation you're referring to in your comment, right? It is entirely possible I have misunderstood the scenario you were referring to.

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